Saturday 21 September 2019

Julian Lee: 'Curbing powers of Opec could be costly for the US'

 

Oil supply: An employee looks out over transport pipelines on the Arabian Sea in Saudi Aramco’s Ras Tanura oil refinery and oil terminal as the debate over Opec power goes on in the US. Photo: Bloomberg
Oil supply: An employee looks out over transport pipelines on the Arabian Sea in Saudi Aramco’s Ras Tanura oil refinery and oil terminal as the debate over Opec power goes on in the US. Photo: Bloomberg

Julian Lee

The US Department of Justice is reviewing anti-trust laws aimed at curbing Opec's power over oil markets.

It raises the prospect of anti-Opec legislation landing on President Donald Trump's desk for signature.

However, tempting as it might be, the long-term cost of ending the group's influence over prices would far outweigh any quick gains.

Bipartisan anti-Opec bills have been introduced in both the House and Senate, although neither chamber has voted on them yet.

The House Judiciary Committee in June approved the "No Oil Producing and Exporting Cartels Act" - known as the NOpec bill. That would amend the Sherman Antitrust Act of 1890 to give the US Attorney General authority to file a suit against Opec for trying to control oil production or affect crude prices.

Previous presidents said they would veto such legislation. How Trump would react is, as so often, impossible to predict. His love of cheap gasoline and Twitter rants against Opec suggest lawmakers have more of a friend in the White House.

However, his public support for Saudi Arabia's Crown Prince Mohammed bin Salman hints he may balk at signing into law an act that would damage the kingdom and put at risk those arms sales the president is so keen on.

The rationale behind the NOpec legislation is clear. Crude oil costs make up about 60pc of US pump prices for gas and diesel, far more than in Europe where taxes make up most of retail prices. Cut crude prices, by curtailing Opec's power, and you quickly get cheaper gas. The benefits are spread widely and there's a clear link to policy - just what every politician loves.

But the situation is less straightforward than that. Soaring US oil production means it makes a much bigger contribution to the economy than was the case just a few years back.

So the benefit of low crude prices for the US is a lot less clear now than when oil prices were $100 a barrel and US production was about half what it is today.

The recent slump in crude prices will probably worsen the US's "already challenged" economic outlook, according to Morgan Stanley strategists. It may begin to weigh on the dollar too, TD Securities says.

And what about the broader impact of curtailing Opec's ability to manage global supply to reflect changes in demand?

I have written before about how it would cripple the whole sector's ability to respond to unexpected supply losses.

True, soaring shale oil output has let Trump slap sanctions back on Iran without triggering a surge in prices.

But that won't last forever. In five years' time, we're going to need a new safety net. If the Opec countries aren't providing it, who will?

Saudi Arabia says it won't balance supply and demand on its own.

The agreement that helped lift oil prices after their steep fall in 2014-15 took so long to put together because the kingdom insisted producers from outside Opec join the push.

We have no recent experience of a "free" oil market. Supply management by Opec was preceded by even tighter control by the "Seven Sisters" group of oil companies and, before that, the Texas Railroad Commission.

We have to look back to the earliest decades of the industry in the 1860s and 1870s to see the real impact of a truly free market. It was the most volatile period for oil prices in history - apart from the Seventies with the Arab oil embargo and Iranian revolution.

There's also the question about at what price you stop making money from investing in fields. With Brent at $50, the Gulf of Mexico and large parts of the US shale patch become uneconomic.

So if you want to stop Opec managing the oil supply to support prices, be careful what you wish for. It's a thankless, but very necessary, task.

Bloomberg

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